LAIX Inc.
Q1 2021 Earnings Call Transcript

Published: 27 May 2021

[Operator:]

Hello ladies and gentlemen. Thank you for standing by for LAIX Inc.'s First Quarter 2021 Earnings Conference Call. At this time, all participants are in listen-only mode. After management's prepared remarks, there will be a question-and-answer session. Today's conference call is being recorded. I will now turn the call over to your host, Mr. Bing Sun, Chief Financial Officer of the company. Please go ahead, Bing.

[Bing Sun:]

Hello everyone and welcome to the LAIX's first quarter 2021 earnings conference call. The company's results were issued earlier today and you can download the earnings press release and sign up for the company's distribution list by visiting our IR website at ir.laix.com. Today's discussion will contain forward-looking statements relating to future performance of the company. Such statements are not guarantees of future performance and are subject to certain risks and uncertainties. Some of these risks are beyond the company's control and could cause actual results to differ materially from those mentioned in today's earnings release and this discussion.

[Yi Wang:]

Thanks Bing. Hello everyone. Thank you for joining our first quarter 2021 earnings conference call. We're pleased to have made a lot of progress in operations which led to outstanding financial performance in the first quarter of 2021. With net revenues of RMB198.5 million, meeting our previous guidance range; gross margin further expanded to 77.6%; 75.4% in the previous quarter. We have achieved meaningful profitability on a quarterly basis for the first time ever, reporting net income of RMB12.2 million for the first quarter. We have been proactively making significant strides in enhancing our operating efficiency and optimizing our organizational structure, driving our margin expansion and improve the profitability. As we move to further our leadership position in the market with our user-centric products and services, we have been steadily enhancing the user learning experience by providing technology powered results-oriented courses and services. In April, we beta launched our AI teacher app as a standalone product. While it is still being tested, we have received very, very positive feedback this far, in particular, the overall rating for Alex, which we believe is probably one of the first such AI robotic conversational tutor in the world, from our paid users with 4.7 out of five, with over 80% of them giving a five star rating. Interestingly kind of like the teacher is one of the top three reasons why users like our product, even though Alex is only an AI teacher. With the goal to provide a user-centric learning experience, Alex is a massive leap forward in AI-powered learning technology. And a very innovative product in the industry around the world. It can be introduced as a standalone product or integrated into other products with great monetization potential. In fact, the average conversation time between Alex and a user is over 12 minutes per session, which is probably the world's longest average conversation time between a full duplex voice system and human.

[Bing Sun:]

Thank you, Yi. Let's now look at our key financial matrix in the first quarter of 2021. Net revenue were RMB198.5 million, 15.7% decrease from RMB235.5 million for the previous quarter, and a 13% decrease from RMB228.3 million for the same quarter last year. The quarter-over-quarter decrease was primarily attributable to a decrease in gross billings caused by the company's a stringent to cost the control in user acquisition expenditures. Cost of revenue was RMB44.4 million, a 23.2% decrease from RMB57.8 million for the previous quarter, and 43.6% decrease for RMB78.8 million for the same quarter last year. The quarter-over-quarter change was primarily due to the decrease in salaries and the welfare for full-time employees and the savings in IT service fee. Gross profit was the RMB154.1 million, a 13.2% decrease from RMB177.6 million for the previous quarter and a 3.1% increase from RMB149.5 million for the same quarter last year. Gross margin was 77.6% compared with the 75.24% for the previous quarter, and the 65.25% for the same quarter last year. Total operating expenses were RMB145.4 million, a 32.5% decrease from RMB215.2 million for the previous quarter, and a 58% decrease from RMB346.1 million for the same quarter last year. The changes were primarily due to stringent cost control in user acquisition expenditures, and the improvement in our operating efficiency. Sales and marketing expenses were RMB92.9 million, a 38.2% decrease from RMB150.4 million for the previous quarter, and 64.9% decrease from RMB264.7 million for the same quarter last year. The decrease was primarily due to the company's stringent cost control in advertising and the user acquisition expenditures. And secondly the decrease in salary and the staff benefits due to the efficiency improvement of personnel management. Sales and marketing expenses as a percentage of net revenue decreased to 46.8% for the first quarter of 2021 compared with 63.9% for the previous quarter, and 115.9% for the same quarter last year. Research and development expenses were RMB33.7 million, a 9.3% decrease from RMB77.2 million for the previous quarter and a 43.1% decrease from RMB59.2 million for the same quarter last year. The changes were primarily due to the efficiency improvement in personnel management. R&D expenses as a percentage of net revenues was 17% for the first quarter of 2021 compared with 15.8% for the previous quarter and 25.9% for the same quarter last year.

[Operator:]

Thank you. Your first question comes from the line of Elsie Sheng with Morgan Stanley. Your line is open.

[Elsie Sheng:]

Thank you. Thank you, management. I have two questions. The first is regarding the regulation environment, we noticed that on their strict regulation on a K-12 regarding advertisement and also the English tutoring for kids below six years' old, wondering how does that impact your K-12 business? Remember that you have developed some English products for K-12? And also secondly on -- how do you foresee the growing trend? And also margin trend for the year? Do you still expect to maintain a profitability on a full year basis? Thank you.

[Yi Wang:]

Thank you for the question Elsie. I'll answer the first one. Yes, we were very -- we have been very closely monitoring the regulation changes recently. First of all, as you know the majority of our revenue still consists of the adult business or which is not impacted. Secondly, with regard to the kid's business, first of all, we focus entirely on the skills, not -- I mean not test prep, but around the real communicative capabilities of the kids and we are still closely monitoring the regulation changes and a bulk of our traffic actually does not come from traffic acquisition, but internal cross-sell from our adult business -- from the adult users who are also parents themselves. So, the impact on advertising limitation would be limited. And we have been steadily increasing our internal referral rate as well. So, as a mean to diversify our user acquisition capabilities. So, these are some of the things that we have in our control to adapt to regulation changes. So, we are investing in some other areas of that are not consistently regulated by the regulation changes, as another way to diversify our portfolio and continue to serve our user.

[Bing Sun:]

Yes, I'll take care of the second question Yi. As Dr. Yi just said we are very pleased to announce that we achieved the profitability on the quarterly basis for the first time ever. Our continued focus on improving our operational leverage led to total operating expense for the first quarter of 2021 decreasing by 32.5% quarter-over-quarter and 58% year-over-year. This is a testament once again to our firm commitment and ability to execute the cost of control. With our main businesses starting to stabilize, we hope and we expect that our new business initiatives as Yi mentioned in his part will contribute more and more in the future. We will be happy to discuss these initiatives in more details once they are more substantiated. Going forward, our focus will remain on enhancing operational efficiency and improving our bottom-line.

[Elsie Sheng:]

Okay. Thank you very much.

[Operator:]

Your next question comes from the line of Jenny Lee from Chinese Capital Management. Your line is open.

[Unidentified Analyst:]

Hi management. Congrats on driven profitability for the first time in your history. And I'm wondering if this is sustainable? And how should we expect the bottom-line to trend in the coming quarters? Thank you.

[Bing Sun:]

Thanks Jenny for the question. I think I might have just mentioned that in my previous respond. We showed the ability for the first time in this past first quarter. And like I just mentioned, we will continue to focus on improving operation leverage, and whether we can increase our growth rate and make our growth sustainable and the bottom-line stay positive, it depends on our ability, like I just said, whether we can continue to keep our healthy cost structure on one hand and on the other hand, whether we can effectively and quickly implement our growth initiative like Yi has just mentioned, for example, the oversea market expansion, and they're using our PT test capability to expand the into B2B market and so on and so forth. So--

[Unidentified Analyst:]

Okay. Thank you.

[Operator:]

As there are no further questions, now I would like to turn the call back over to the company for closing remarks.

[Bing Sun:]

Thank you once again for joining us. If you have further questions, please feel free to contact LAIX's Investor Relations and through the contact information provided on our website or TPG Investor Relations.

[Operator:]

This concludes today's conference call. You may now disconnect your line. Thank you.

[Bing Sun:]

Thank you.